The IRS finally realized many financially distressed taxpayers are struggling to pay their bills – including their tax bills. So the IRS recently released new “Fresh Start” initiatives to provide some relief to qualified taxpayers most affected by the economic downturn.
Penalty Relief
Failure-to-pay-tax penalties can add up to 25% on top of your unpaid tax liability. The IRS will now grant a six-month grace period on these penalties to certain wage earners and self-employed individuals who apply for relief. Approved taxpayers will not have to pay failure-to-pay penalties for 2011, only if the tax, interest and other penalties are fully paid by October 15, 2012 – 6 months after the tax was originally due.
Qualified taxpayers must file the new Form 1127A to request the grace period. In order to be eligible for penalty relief, you must be either:
- A wage earner who has been unemployed at least 30 consecutive days during the period January 1, 2011 to April 17, 2012 (the 1040 tax return due date for 2011).
- A self-employed individual who experienced at least 25% reduction of business income in 2011 because of the economy.
The penalty relief is available if the taxpayer’s balance due is $50,000 or less. In addition, the taxpayer’s income cannot exceed $100,000 ($200,000 married jointly filers).
Note: You are strongly advised to file your 2011 tax return by the due date, April 17, 2012, or request an extension to file.
Installment Agreements
An installment agreement provides an option if you can’t pay the IRS everything you owe by the due date. The new Fresh Start imitative allows taxpayers who owe up to $50,000 to request an installment payment plan with the IRS without supplying a financial statement. This is a substantial increase from the prior $25,000 threshold. The maximum term to pay has been increased from 60 months to 72 months.
Taxpayers owing over $50,000 will still need to provide the IRS with a Collection Information Statement.
Note: You can pay your tax balance down to the $50,000 threshold and then request an installment agreement without supplying a financial statement to the IRS.
Offer in Compromise
As the name implies, an Offer in Compromise is an agreement with the IRS that allows a taxpayer to settle their liability to the IRS for less than the total amount owed. The IRS considers your circumstances such as your ability to pay, income, expenses and net worth (assets minus liabilities). The new Fresh Start initiatives allow the IRS to use more flexibility to decide what would be a reasonable settlement plan for distressed taxpayers.
These new rules can help a taxpayer in financial need, but working with the IRS is a complicated process at best. IRS negotiations should be handled by an experienced tax professional.
